Cryptocurrencies like bitcoin and ethereum are a “poor substitute” for state-backed currencies and would break the internet if used in their current form at a national scale, according to a report published today by a powerful central banking body.
The Bank for International Settlements (BIS) said that the lack of a central institution backing cryptocurrencies means they risk breaking and proving worthless for holders, along with a host of environmental and operational issues.
“Trust can evaporate at any time because of the fragility of the decentralised consensus through which transactions are recorded,” the report said.
The need for the decentralised blockchain ledger which records transactions to be updated eventually by every user has caused congestion as cryptocurrencies have become increasing popular.
The entire bitcoin blockchain constitutes around 170 gigabytes of data, meaning that the average smartphone would be unable to store the blockchain with “a matter of days” if it started to handle all of a country’s retail transactions, the BIS said.
“The associated communication volumes could bring the internet to a halt, as millions of users exchanged files on the order of magnitude of a terabyte,” the BIS said, in a hypothetical example.
The explosive rise in the value of bitcoin at the end of last year has put digital currencies firmly on the agenda of regulators and economists around the world, with the Bank of Englandhaving examined some of the implications of an as yet unplanned central bank-backed version. Yet arguments for central bank-backed digital currencies “have not produced a strong case for immediate issuance,” the BIS said.
The Basel-based BIS, often known as the central banks’ central bank, raised a catalogue of potential problems, and said trust in digital currencies’ stability, “the essence of good money”, is lacking, in a damning assessment of a technology which many economists believe could transform the monetary system.
Meanwhile, the “vast energy use” required is highly inefficient, with energy used for bitcoin mining alone equal to that of the entire Swiss economy.
However, the underlying blockchain technology could be used in financial settlement, the BIS said, echoing warnings by International Monetary Fund boss Christine Lagarde that the clearing industry will likely see significant upheavals in the coming years.
“Cryptopayment” systems based on sovereign currencies could also have a future, the BIS said, with cross-border payments in particular ripe for disruption by the technology.